CITIGROUP/MERRILL LYNCH & CO.
Goldman Sachs increases estimates of CDO-related writedowns
Analyst William Tanona said that although we have seen many firms take the appropriate actions in recent weeks as they relate to write-downs and capital raises, he still believes it will be a couple of quarters before the current credit crisis is fully digested by the markets. Tanona now estimates Citi (C) will record a CDO-related write-off of $18.7 billion in the fourth quarter vs. his prior estimate of $11 billion. As such, he widened his fourth-quarter loss per share estimate to $1.33 from a 52-cent loss. Given the magnitude of write-downs he projects, and Citi's remaining exposure, Tanona thinks the firm has a serious need to preserve or raise additional capital. He now assumes Citi will raise an additional $5-$10 billion and cut its dividend by 40% in 2008. The analyst rates the shares sell.
As for Merrill (MER), Tanona says that following the recently announced $6.2 billion equity infusion, the company's total share count was increased by about 130 million shares, which dilutes earnings by about 12%. Tanona raised his estimate for Merrill's fourth-quarter CDO-related writedowns to $11.5 billion from $6 billion. Even still, he figures that following this writedown, Merrill would still be exposed to about $8 billion in CDOs. Tanona widened his fourth-quarter loss per share estimate to $7.00 from a $1.50 loss. Although he's assuming a more challenging outlook, and despite dilution from Merrill's recently announced $6.2 billion capital raise, he boosted his $5.50 2008 EPS estimate to $5.80 as he accelerated a significant amount of the losses he'd assumed in 2008 into the 2007 fourth quarter. He rates Merrill shares neutral.
Broadpoint Capital cuts estimate and price target; keeps buy
Analyst Paula Kalandlak says that according to her records, the company's GYMB Gymboree division began its semi-annual Red Balloon Sale almost a week earlier this year than in fiscal 2007 (Jan.). Also according to her records, Gymboree took its first markdown on recently introduced girls' and boys' lines after only four weeks at full price; she notes the retailer usually keeps its lines at full price for 5-7 weeks. Given increased promotional activity and quicker markdown cadence, believes there will likely be more gross margin pressure than she previously forecast. Kalandlak cut her 83 cents fourth quarter EPS estimate to 78 cents. She also lowered her $53 target price to $45.